I am a Professor of Entrepreneurship at Babson College, the world’s leading program in this field and am Managing Director at EntrepreneurShares (a registered investment advisor investing in publicly traded entrepreneurial companies). I have a Ph.D. in Finance and hold the Chartered Financial Analyst (CFA) designation. I also have an MPA from Harvard University and founded the Shulman Review (which trained over 12,000 CFA candidates in 110 countries around the world). I publish extensively on publicly traded entrepreneurial companies and recently created a Billionaires Index based on the annual Forbes list. (https://plus.google.com/9a72bbbc-445bca24-d5adf8f654/posts?rel=author)

Should Investors Run For The Hills Or Stay The Course?

As summer winds down and a hint of fall is in the air, US stock markets appear to be at a crossroads. On the one hand, capital markets have enjoyed a strong rally year-to-date (YTD) in 2013 with gains in the 15%-20% range. This comes on top of double-digit returns for 2012. On the other hand, Fed policies are threatening to come to an end and potential war in the Middle East could send stocks plummeting. Investors are now struggling with the dilemma of whether to protect YTD gains or gamble on future appreciation.

Well, investing in long bonds is probably not the answer! Rising interest rates have cratered bond funds; and with more rate hikes on the horizon it’s probably the last place to go. But with the threat of war casting an ominous cloud over capital markets, stocks have the potential to plummet quickly too. A strong correction in the market could negate an otherwise strong year. Should investors just cash out now while they are ahead of the game?Given all the tumult, along with September’s historically negative performance, what’s a savvy investor to do?

Perhaps they should take their gains! Even with a little dip in August, equity investors can liquidate their holdings before Labor Day and enjoy a very strong year. But what if war never arises? Or, what if the markets provide a small dip and simply provide a buying opportunity for the second half of the year? Greed provides a tough match for fear. There is every possibility that the markets, though high, could go much higher still.

Our academic research tracks the performance of US entrepreneurial companies over an extended period of time. We look at both good times and bad and monitor the patterns. Historically, entrepreneurial companies tend to perform better than average in strong market conditions and the same or worse during weak markets.

Our data of 100 US, publicly traded, entrepreneurial companies show YTD appreciation of approximately 30% through July! These returns outstrip comparable benchmarks (Russell 2000, Russell 3000, and S&P 500) and match past performance. Who knows if there are more gains in the future? Leading the way are well-known names such as Tesla MotorsTesla Motors and NetflixNetflix. Few investors in the market are not already familiar with the performance of these companies. They have been the subject of frequent media reports and have generated YTD 2013 returns of 378% and 200%, respectively. But there are other, lesser-known companies such as Ubiquiti NetworksUbiquiti Networks, ShutterstockShutterstock, and Comscore that have also appreciated more than 100% YTD.

Why do entrepreneurial companies perform so well? As a rule, these companies tend to be led by charismatic stewards that focus on organic growth and employ tight management teams at the top. Moreover, they tend to react quickly to changes in market forces and opportunistically benefit when bureaucratic competitors stagnate. When bureaucratic companies flail, these guys shine. Obstacles for some companies often become opportunities for entrepreneurs.

Of course, this should not imply that entrepreneurial companies are immune to macro-economic conditions. If markets decline, entrepreneurial companies will follow suit. Over a long period of time, however, these companies tend to emerge as winners. They have proven this in the past and seem well positioned to finish out 2013 on a strong note. Moreover, there are still a number of companies (specifically in the small cap sector) that have not yet returned to 2007 levels. This means that if/when the floodgates open and capital starts to escape fixed income buckets, appreciation still awaits equity investors. In summary, it certainly seems tempting to take the money and run. But the entrepreneurs closest to the day-to-day problems do not have the luxury to turn their businesses on and off like a light switch. As a rule of thumb, investing alongside entrepreneurs tends to work well over the long haul.

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